Credit Karma 101: The good and the bad.

EDIT: Last updated 6/17/23 Credit Karma is a very popular CMS that almost everyone seems to know about these days thanks to television commercials, radio spots and other advertising. Typing any number of credit-related phrases into a search engine such as "fix my credit" or "credit score" will almost always return a first-page result for Credit Karma. Most people when they sign up for Credit Karma have very limited knowledge of how credit works. As a result, they are very easily influenced or even manipulated by what they are presented. Many individuals that find this site will be new to credit, a point validated by the fact that they're reading this in the "Credit for Beginners" section. I wanted to share what I believe to be the good and the bad of Credit Karma. I feel everyone should only focus on the good, while understanding why the bad is in fact bad and should be ignored. Let's start with the good: It's free! Daily updates to your TransUnion credit report. Updates to your Equifax credit report at least weekly, often more frequent than that. Credit report monitoring for TU / EQ. Resources such as dispute filing, different calculators, unclaimed money, articles to read, etc. The bad: The score(s) you are provided are not Fico scores! They are from the VantageScore 3.0 model and are rarely used in lending decisions. VS3.0.jpg I know someone that works at a car dealership and says that people come in all the time after getting their "credit score" from Credit Karma thinking that they're golden for loan. While they may have a "good" 700+ VS 3.0 score on Credit Karma, the dealership comes back with a (say) 620 Fico score and tells them they can't get decent financing. These individuals are shocked and caught by surprise, all because they didn't understand the difference between the nearly irrelevant scores provided by Credit Karma and the highly meaningful Fico scores used by lenders. Products pushed such as loans and credit cards are there for Credit Karma to make money. Don't be manipulated by their "approval odds" or targeted offers. CKcreditcardoffer.jpg The only reason Credit Karma is spamming you with an ad like the one above is because they get a kick back if you click the apply now button and proceed. CKcreditcardoffers1.jpg One may be drawn to apply for the card above with "excellent" approval odds, but that doesn't mean you'll necessarily be approved for it. For example, if one has already opened 5 accounts within the last 24 months (5/24) then their approval odds for the Chase card above not only aren't excellent, they're essentially zero and it would be a waste of time (and an inquiry) to apply. Ignore the front-end "fluff" from Credit Karma. Each section on scoring criteria comes with a color-coded display with your usual green/good, yellow/fair and red/poor ratings. From a Fico scoring perspective, which is all you need to worry about when it comes to lending decisions, each and every one of these sections is misleading. I'll take you through each one by one and explain: Payment history: When it comes to on-time payments, there's really only two categories. You've either never missed a payment (good) or you have (bad). All it takes is 1 missed payment to severely impact your Fico scores. The image below from Credit Karma however shows green for both 99% and 100% of payments made on time, suggestive that something less than 100% is still "good." I can assure you that even 1 missed payment is bad! CKpaymenthistory.jpg It's also worth noting that this summary page above only considers payment history for the last 24 months. Fico scoring looks at your payment history for the last 7 years. Someone could have horrific payment history with dozens of late payments across multiple accounts that are all 3-5 years old, but if they haven't had any in the last 24 months the image displayed by Credit Karma would be a pretty green 100%. Very manipulative and certainly misleading. Derogatory Marks: Just like payment history above, when it comes to derogatory marks having just 1 is bad. The image below from Credit Karma suggests that 1 only puts someone into the yellow and isn't poor, when a single derogatory item can crush Fico scores. CKderogatories.jpg Credit Age, or age of accounts is an important Fico scoring factor. The Credit Karma image below shows average age of open accounts, which is not how the Fico or VS algorithms work. They look at both open and closed accounts, as they count equally when it comes to age factors. Second, the image you see suggests that having an average age of accounts of less than 2 years or 2-4 years are equally poor, as both are shown as red. An average age of accounts under Fico scoring of 1 year verses 3 years is significantly different and would in no way be viewed as the same. CKcreditage.jpg Inquiries: Credit Karma's graphic suggests that 0 inquiries is no better than 1-2 inquiries, as both are color-coded green. Moving from 0 inquiries to 1-2 inquiries depending on Fico scoring model could result in anything from a small score drop to a moderate one, so we can't consider them to be equally good. CKinquiries.jpg Total accounts: This summary image from Credit Karma just makes me angry. It is suggestive that anywhere from 0-10 accounts on your credit report would be bad, where 11-20 accounts would be good. From a Fico scoring standpoint, this is just terrible information. An important segmentation factor for Fico scorecards relates to file thickness. A thick file is better than a thin file. While the exact point of thick vs thin may not be known, we have a fairly good idea. For example, someone with only 2 accounts has a thin file, where someone with 7 accounts has a thick file. Under no Fico scoring circumstance would the 2 account file be considered an equal to the 7 account file, all other things being the same. CKtotalaccounts.jpg Utilization: The Credit Karma graphic suggests that reported utilization anywhere in the 0%-29% range is equally good. We know for Fico scoring that this is not the case and that overall utilization of a low single-digit percentage is going to return a higher Fico score than a double-digit overall utilization percentage. We also know that there's a Fico scoring penalty for "no revolving credit use" when $0 of utilization is reported across all accounts (that is, not a single non-zero reported balance). CKutilization.jpg Simulator: Credit Karma has a score simulator just like many CMS provide. Simulators are notoriously unreliable, so it's best to ignore them. This isn't unique to just Credit Karma and their simulator isn't any "worse" than any other... I just say steer clear of them all for anything other than entertainment purposes. With the proper information provided, the members of this forum can give predictions that will make any simulator out there go cry in the corner. Another huge point to make is that most CMS (not just CK) provide "alerts" to report data changes. Many people are mislead by these alerts, because they incorrectly believe that any score change that accompanies an alert is a direct result of the alert reason provided. With Credit Karma, they have something that says "see what's changed" which is their version of an alert list. Things on the alert list can impact a credit score change, but they may not. Conversely there are things that can impact a credit score change that are not "alertable" and therefore aren't included on the list. Where people go wrong is that they see a score change, click on "see what's changed" and if there's only 1 thing listed there they conclude that their score change was due to the alert reason provided. Sometimes it is, sometimes it isn't. When it isn't and people incorrectly believe it is, they move forward with an incorrect perception of how scoring works. For example, they may see that their balance increased on an account from $100 to $800 and their score happened to go up at that time (from something else not alertable). They walk away thinking "my score went up because my balance went up... this means if I spend more my score increases!" which is of course absolutely false. It's very important to understand that what you see under "see what's changed" on Credit Karma is only pointing you to alertable credit report data changes, not to why your score changed. I hope that the above information is helpful to those that are just getting into credit and want to know about the good and bad of Credit Karma. In summary, enjoy the fact that for FREE you're getting daily/weekly updates to your TU/EQ reports, credit report monitoring and other resources that you may find useful. Outside of those positives, really ignore the rest. The scores provided are not Fico scores, the products they push on you are there for them to make money, and their front-end fluff can be very misleading meaning that it should be ignored.